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BMW hit by development costs and new-model production boost

Investments to develop electric and self-driving cars has weighed on earnings

07 November 2018 - 18:33
Edward Taylor

A BMW logo on a car at the 87th International Motor Show at Palexpo in Geneva, Switzerland. Picture: REUTERS/DENIS BALIBOUSE

German carmaker BMW will deepen cost cuts after higher development expenses contributed to a 27% drop in third-quarter operating profit, falling short of analyst expectations, with currency effects also taking a toll.

Investments to develop electric and self-driving cars, as well as spending to boost production of new X5, X7 and 8-series luxury models, weighed on earnings when tariffs between China and the US and a price war in Europe were already eroding margins.

BMW said capital spending would rise again in the fourth quarter owing to the start of production for a new version of its BMW 3 series.

“Additional measures will be needed to support our profitability targets,” CFO Nicolas Peter said in a call to discuss earnings. He gave no details. “Despite the difficult conditions, we are still targeting a free cash flow of €3bn for the full year,” Peter said. “In the light of the current challenges, this will not be an easy task.”

BMW’s earnings before interest and taxes of €1.75bn came in below the €1.8bn forecast in a Reuters poll as higher raw-material prices, currency effects and €679m in provisions for vehicle recalls had an impact.

The share price of BMW, which also has brands such as Mini and Rolls-Royce, fell 1.9% to €75.44 by 11.55am GMT.

BMW said that despite a slight rise in deliveries of luxury cars, its operating return on sales for the automotive division narrowed to 4.4% from 8.6% a year earlier, well below its targeted range of 8%-10%.

BMW had warned in September that its pretax profit would fall this year, against earlier expectations for a flat outcome, and cut its profit margin guidance for cars, blaming intense price competition and trade and currency headwinds.

“Compared with 2017, additional upfront expenditure of about €1bn for the mobility of the future and a high three-digit million-euro negative impact from exchange-rate and raw materials price developments had been factored into expected earnings for the year,” BMW said on Wednesday.

While BMW had fewer problems than rivals Volkswagen and Daimler in selling cars that conform to the new Worldwide Harmonised Light Vehicle Test standards, the onset of the rules has led to cut-throat competition, supply distortions and heavy discounting.

BMW said it would buy raw materials such as cobalt and then make them available to battery-cell suppliers to secure a supply of electric car batteries.

BMW is establishing a technology consortium with Swedish battery maker Northvolt and Belgium’s Umicore to develop a value chain for battery cells in Europe, including development, production and eventually recycling.